Industrial outlook darkens ahead of tariffs

In the run-up to Tuesday’s promised barrage of tariffs against Mexico, Canada and China, the U.S. industrial sector is not looking so hot — a dark omen for domestic freight demand.

Unstable foundations for housing

For one, construction spending took an unexpected hit in January, down 0.2% from December against consensus expectations of stability. Outlays for private residential projects fell 0.4%, despite a 0.6% monthly rise in single-family spending.

As has been the case for three years now, high interest rates are weighing on the construction industry, keeping mortgages expensive and deterring investments from businesses. 

Yet the upcoming tariffs against Canada — the largest supplier of lumber to the U.S. — are likely to add another source of upward pressure on housing prices. 

A recent interview with Commerce Secretary Howard Lutnick revealed that, though China is almost sure to be slapped with an additional 10% tariff, President Donald Trump has not yet decided on “how exactly he wants to play it with Mexico and Canada,” which is still “a fluid situation.”

In other words, even if Canada and Mexico do not manage to secure another last-minute delay or even avoid tariffs altogether, they might still face a tax rate lower than the initially promised 25%.

There is a slim chance that Canadian lumber might be exempted from any new tariff increases, given the already high duties against it. The Biden administration nearly doubled tariffs against Canadian softwood lumber last August, raising them from 8% to 14.5%.

Still, domestic lumber production has been on a downward trend the past few years, falling 23% from 2017 to 2022. In the first 10 months of 2024, Canadian lumber imports accounted for nearly a quarter of U.S. consumption, with domestic supply largely making up the remainder.

Trampling on green shoots?

Sentiment in the industrial sector is mixed, according to the two most important monthly releases on the subject.

The Institute for Supply Management’s Manufacturing PMI saw its second straight month of expansion in February, following 26 consecutive months of contraction. Even so, the rate of growth diminished from January, as the headline index fell from 50.9 to 50.3.

Perhaps the standout metric from this report was the Prices Paid Index, which surged 7.5 points to 62.4 — its highest reading since June 2022. That same month was when consumer inflation peaked at 9.1% yearly growth; any comparisons made to the present are thus unwelcome.

Comments from various sectors all reveal an intense concern over the upcoming tariffs. One anonymous manufacturer of transportation equipment noted that “customers are pausing on new orders as a result of uncertainty regarding tariffs.” The respondent also voiced frustration that “there is no clear direction from the administration on how they will be implemented, so it’s harder to project how they will affect business.”

This uncertainty might be the biggest source of tension: A producer of nonmetallic mineral products confessed that “management now has us running scenarios to project tariff impacts to our business. They want numbers in 24 hours on variables that equate to a wild guess. Interesting times we live in.”

The other major release on industrial sentiment, the S&P Global US Manufacturing PMI, was markedly more optimistic. 

The headline index rose from 51.2 to a 32-month high of 52.7, beating last week’s preliminary estimate of 51.6. February’s growth came from a rise in both industrial output and new orders.

There is a concern, however, that these tailwinds might reverse course in the near future: Per Chris Williamson, chief business economist at S&P Global Market Intelligence, “growth was partially driven by client restocking, with customers reportedly keen to get ahead of higher prices and possible supply challenges should a wider range of goods be subject to tariffs.

“Worries have noticeably swelled in relation to the inflationary impact of tariffs,” Williamson continued, “which were widely reported as having caused factory input costs to spike higher in February. These higher costs are being passed on to customers, resulting in the strongest factory gate price inflation recorded for two years, which manufacturers fear may in turn not only damage sales in the coming months but also encourage the Fed to take a more hawkish view of inflation.”

These tariff-induced fears have darkened businesses’ outlook for the year ahead, a quick reversal from January’s jubilance.

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